Background

Purpose

The purpose of this Departmental Instruction is to inform States about amendments to theVeterans' Entitlements Act 1986(the VEA) concerning the treatment of financial assets which are regarded as unrealisable for the purposes of the hardship provisions under the assets test.

Legislation

The amendments are contained in Schedule 2 of theVeterans' Affairs Legislation Amendment (Further Budget 2000 and Other Measures) Act 2002, which received Royal Assent on 4 April 2002.

Start date

The changes commenced on 20 September 2001.

Reason for start date

These amendments were originally contained in theVeterans' Affairs Legislation Amendment (Further Budget 2000 and Other Measures) Bill 2001. This Bill was not passed by the Parliament and lapsed when Parliament was prorogued upon the announcement of the 2001 election. This necessitated the introduction of a further Bill hence the delay in passage of the relevant legislation.

Financial hardship rules and reason for changes

What are the financial hardship rules?

These rules must be applied by the Commission if the person or the person's partner has an unrealisable asset

[18][2]; and the delegate is satisfied that the person would suffer severe financial hardship if the financial hardship rules were not applied.

Reason for hardship rules

Sections 52Y and 52Z were added to the VEA in 1991 and were designed to “cater for those people who have substantial assets which reduce their entitlement under this Bill but which produce little or no income and cannot readily be sold or used as a security for a loan

Reason for changes

If the unrealisable asset is a financial asset, the extended deeming provisions contained in sections 46D and 46E are applied. The application of the extended deeming provisions will not affect the amount of pension if the rate of pension continues to be determined by reference to the assets test. The situation is different if the rate of pension commences to be determined by the income test. In these circumstances, a lower rate of pension could be assessed by attaching a deemed income to the value of the unrealisable financial asset. Usually, the income deemed on such an investment will exceed the actual income earned by the person from the unrealisable asset.

Outcome an unintended consequence

This outcome is an unintended consequence flowing from the introduction of the extended deeming rules in 1996

[21][5]. Such an outcome is not justified in view of the circumstances that led to the grant of the hardship determination in the first place.

Advantages of changes

Under the current legislation, there is discretion for the Minister to determine that specified financial assets are not to be subject to the deeming rules contained in sections 46D or 46E

[22][6]. This requires the person to first satisfy the delegate that a section 52Y determination is warranted and then approach the Minister for a determination for relief from the deeming rules.

The changes remove the need for this and automatically prevent the application of the extended deeming provisions to the unrealisable financial asset. In these circumstances, only the actual return on the investment is assessed as ordinary income.

What are the legislative changes?

New rules

The new rules prevent the application of the deeming rules and state that the return (if any) is to be assessed as ordinary income.

New subsection 46K(2)(b)

Generally, any return on a financial asset that a person actually receives is not regarded as ordinary income - subsection 46K(1)

Subsection 46K(2) provides for exceptions to this rule. The exceptions involve financial assets, which are not to be regarded as financial assets for the purposes of sections 46D or 46E.

Subsection 46K(2) has been amended to make it clear that the actual return that any person receives on an unrealisable financial asset is treated as ordinary income.

New paragraph 46L(1A)

Section 46L makes provision for specified financial investments or classes of financial investments not to be regarded as financial assets for the purposes of section 46D or 46E.

From 20 September 2001, a new subsection 46L(1A) is added to 46L. This subsection makes it clear that where a determination is made in relation to a person under s.52Y, any unrealisable financial asset of the person or the person's partner isnot regarded as a financial assetfor the purposes of section 46D or 46E.

What are the procedural changes?

Procedural changes

Whilst no cases have been identified to date, these changes should be borne in mind when considering cases where hardship is an issue.

State Office processing staff must now recognise that if a financial asset is determined to be unrealisable under s.52Y for the purposes of the hardship provisions, it must be exempted from the deeming provisions. This requires the following manual action:

Step

Action

1

Locate the financial asset, which has been determined to be an unrealisable asset for the purposes of the hardship provisions.

2

Set the deeming exemption indicator to 'S' for 'State Office Deeming Exemption' against that particular financial asset. This will remove the asset from the deemed income calculation.

3

For loans, bonds or debentures, record the actual rate of interest being earned, derived or received by the pensioner (if any).

4

For other financial assets, record the actual income p/f being earned, derived or received by the pensioner (if any).

Further information

Contact Officer

For further information about these changes, please contact Ian Williams (02) 6289 6382.

The purpose of subsection 46K(1) is to ensure that there is no double counting of income from the financial asset which would ordinarily be subject to the deeming rules contained in sections 46D and 46E.